Saudi Arabia is fast heading into a new era in civil aviation. The privatization of state-owned Saudi Arabian Airlines is under way and plans for the operation of two low-cost airlines are being made.

The privatization process is top priority, according to Finance Minister Dr. Ibrahim Al-Assaf who is keen on transforming the airline into a private company soon. He is so keen that in one of his recent addresses he said that the privatization of Saudia would take place before the issuing of the license for the third mobile phone network.

Saudia, which carried 16 million passengers last year, will be one of the most significant Saudi companies to go public with its planned sale of 30 percent of its equity. It has received the green light from the government to transform its main support businesses into five independent companies as part of the airline’s efforts to speed up the privatization process. The five are catering, cargo, ground support, maintenance and training (the Prince Sultan Aviation Academy) and the airline itself. Shares in the five new companies, the first four of which will have an international strategic partner, will be sold through initial public offering (IPO).

Saudia and its advisers are currently working on a marketing plan to attract businessmen and investors.

Khaled Al-Mulhim, the airline’s director general, has elaborated on plans to transform the organization into a holding company and its strategic units into independent firms. At a recent meeting of the Jeddah Chamber of Commerce and Industry, he talked about the challenges facing the airline and the goals and strategies it has drawn up for the coming 10 years. The airline’s overall improvement plans include services in electronic reservation, first and business class lounges, service units for passengers in major airports, boarding pass kiosks, sales offices and a telephone reservation service. “A plan is in place for speeding the privatization process of non-core businesses in order to transform them into strategic units that will be subsidiaries of the Saudi airline holding company,” says Mulhim.

The marketing campaign to attract investors and international strategic partners for catering began in August 2006 and the business is expected to be ready for sale soon. A similar campaign for cargo is under way and it will be ready for privatization in February 2007, followed by ground support by March 2007 and maintenance and training each in May 2007. The airline itself will be privatized in the first quarter of 2008.

A Saudia committee overseeing the sale met recently under Al-Mulhim’s chairmanship and reviewed progress. It also studied a report by the financial advisers on restructuring the organization. The meeting discussed the time frame and proposals to speed up privatization of units in preparation for the presentation of a final report on the project to the Supreme Economic Council.

The committee agreed that the formation of independent companies for strategic units would boost growth and help meet competition. It also emphasized the need for the financial and administrative independence of these units. The meeting also discussed the prospects for improving performance of Saudia staff and slimming the work force. The airline intends to set out a program for voluntary early retirement.

Up to 49 percent of the catering division will be sold first. “Saudia Catering is a profitable venture, which produced some 15 million meals in the first nine months of 2005 alone. It caters for a large number of airlines operating to and from the Kingdom,” said a senior airline official. “The catering division has had a great impact on the local market because it purchases 80 percent of its materials there.”

Compared to 2004, Saudia’s catering division last year witnessed a 12 percent increase in business, evenly recorded in all of the catering division’s four local units (Madinah, Riyadh Jeddah and Dammam) and its international unit in Cairo.

The airline produces meals for 75,000 flights annually, 11,000 of which are international. In 2005, Saudia Catering received the HACEP International Award from the Societe Generale de Surveillance in recognition of its high food-safety standards. Launched in 1981, the catering business, which includes on board duty-free sales, generated a turnover of $171.5 million and a net profit of $37.8 million with a net operating margin of 25 percent in 2005.

Air travel within the Kingdom may be about to change radically with the start-up of two low-cost airlines. “Most Saudi investors who have applied for licenses to operate private airlines have opted for low-budget airlines,” says Abdullah Ruhaimy, president of the General Authority for Civil Aviation (GACA). Al-Ruhaimy is upbeat about the tremendous success achieved by low-cost airlines in Europe, America, Southeast Asia and some Arab countries. GACA will license two airline companies from the six applicants to operate domestic flights, he says. One of the two will be based at the King Khaled International Airport in Riyadh. King Abdul Aziz Airport in Jeddah will be the main center for Saudi Arabian Airlines, he adds. He is optimistic about the new private airlines and says they will improve aviation services, providing air tickets at reduced charges, operating more flights, facilitating travel procedures and adopting modern technology. He says that the licensing of the two private airlines is in the final stages.

Low budget airlines are a relatively new venture in Saudi Arabia. The Sharjah-based Air Arabia, the first low-budget airline to operate in the Kingdom, recently started flights to Riyadh, Jeddah and Dammam. Air Arabia’s success has also encouraged new private airlines such as Sama and National Air Services (NAS) to try to enter the promising market where at least 10 million people, including expatriates, prefer to fly low-cost.

Al-Mulhim says Saudia has not dismissed the idea of itself providing low-cost no-frills service on some of its routes.

NAS, the Middle East regional private aviation services company, intends to launch a low-cost carrier in Saudi Arabia. The fully Saudi-owned company says that it has submitted an official application to GACA for a license to operate a low-cost airline network in the Kingdom.

“The Middle East travel market is expanding at a rapid pace and Saudi Arabia continues to be a key player in it,” says NAS Chairman Ayed Al-Jeaid. “The Saudi business sector has made tangible strides toward liberalization. This is marked by the many successful IPOs taking place in Saudi Arabia and the growing privatization movement of different businesses including airline industry.”

According to him, the Kingdom is allowing for a greater role of the private sector in contributing to the overall development plan. Being the first privately-owned aviation company that has been licensed in the Saudi market, NAS is set to help develop the Saudi and regional aviation industry infrastructure. “We’re gearing up to win one of the licenses and start low-cost carrier operation. And we’ve entered into strategic alliances with world-class airlines with proven track records in their relevant fields to ensure genuine technology and know-how transfer,” says Al-Jeaid.

The arrival of low-budget airlines comes at a time when the aviation industry is faced with significant economic challenges as well as rising costs and competition as more and more countries are adopting an open sky policy. Experts say low-cost airlines are the answer to the challenges faced by regional airlines. Analysts believe that Sama and NAS will soon operate domestic flights in the Kingdom after obtaining licenses from GACA. With a paid-up capital of SR200 million ($53.3 million) from more than 40 individuals and with some of the Top 100 business groups on its list of shareholders, Sama is getting ready to try and capture an important share of the domestic air traffic.

“This is a highly successful venture,” says Muhammad A. Hakeem, sales executive for Air Arabia in the Western Province in Saudi Arabia. “Low-budget airlines are a different concept. Their operating system is totally different from ordinary airlines,” he says. Low-cost airlines offer a fare that is 48 percent lower than that of other airlines. A 98 percent seat occupancy is required for such airlines to run profitably. There are many factors that make Saudi Arabia a promising market for budget airlines. Saudis love to travel and spend nearly SR60 billion ($16 billion) annually on domestic and international travel and tourism. According to the latest census published in September 2005, Saudi Arabia’s population had reached 22.67 million, including 6.14 million expatriates, although the figure is now thought to have risen to 23.7 million. About 75 percent of the country’s expatriate workers earn low salaries of around SR2,000 ($533) monthly and would certainly choose low-cost travel to their home countries. At present, middle class Saudis as well as expatriates use the Saudi Arabian Public Transport Company (SAPTCO) and private buses and taxis for long journeys. Such road transport is time-consuming.

“There is a demand for budget airlines,” says Abdul Jaleel Mangarathodi, reservation manager at Attar Travels in Jeddah. He says fare increases caused by additional taxes will encourage people to fly budget airlines.

Etihad Airways, the national carrier of Abu Dhabi government, is also operating budget flights to Saudi Arabia and other Middle Eastern destinations. Etihad has made tremendous market share gains within a short time as a result of its quality services at comparatively lower costs.